Notes From the CFA Conference

The CFA Institute held its annual conference in Montreal last week. The conference draws global speakers from academia, the investment industry profession and even rock 'n roll—Sir Bob Geldof spoke. (Unfortunately, he didn’t sing, opting instead to discuss investing in Africa.) The conference also attracts a truly global audience. I sat down across from a gentleman from Brazil. The night before, I interacted with a few attendees from Malawi. (Out of curiosity, I asked about their travel time. It was approximately 22 hours.) In total, there were more than 2,000 attendees, which is a record. (Notably, our own AAII Investor Conference also drew a record crowd last November.) Of course, I realize that what you really want to find out is whether any of the speakers said anything useful in terms of helping you realize higher returns. The answer is “yes,” and I’ll share the highlights.

Peter Berezin, the chief global strategist at BCA Research, discussed what characteristics lead to (or don’t lead to) higher returns for stocks. Smaller market capitalizations and lower valuations (size and value) were two factors associated with higher future returns. Changes in analysts’ recommendations, insider buying combined with falling short interest, momentum (relative outperformance over the past 12 months) and low volume are also linked to higher returns. Among factors to watch out for are rising short interest and insider selling, bearish analyst ratings on small-cap stocks (Berezin emphasized that this works only with small-cap stocks), quick growth in assets and a wide range of earnings estimates by analysts for a specific company. Peter says that the latter is often an indication that companies are trying to hide something.

Karen Firestone, formerly with Fidelity and now the CEO and co-founder of Aureus Asset Management, talked on the subject of risk. An underlying point of her presentation was to let the data and facts determine whether or not taking on risk is justified; it is worth taking the risk if the likely payoff is positive. In the Q&A session following her presentation, she opined that the biggest risk investors take is not being skeptical at high valuations and following group sentiment instead. Karen and I spoke afterward, and a transcript of our conversation will be in a future AAII Journal.

Rupal Bhansali, a chief investment officer at Ariel Investments, spoke about contrarian investing. She described contrarians as being guilty until proven innocent, explaining, “When you march to your own beat, no one else can hear the music.” Her process is to focus on quality. Specifically, she seeks to screen out risky companies: those that are low quality, have bad management and don’t cover their cost of capital. Her goal is to avoid so-called value traps (stocks with cheap valuations, but no significant upward price movement) as companies with traits likely to cause a permanent loss of capital. By doing so, she eliminates the companies she’s not interested in and narrows the universe to stocks she might be interested in owning.

In what might seem to be an odd topic at an investment conference, Jeremy Hunter, an assistant professor of practice at the Peter F. Drucker School of Management, spoke about mindfulness. He discussed how the typical person’s mind wanders 46.9% of the time. Compounding matters, we tend to only see what we look for. This, obviously, can lead to a wide range of unintended consequences and mistakes. In contrast, being aware of what is going in the present moment helps you to be more rational and make better decisions—two very big parts of any successful investing strategy. His suggestion for being more mindful is to work up to meditating 10 minutes per day. Alternatively, track how you react to various situations and then pick a different emotional response to focus on each year.

Harvard professor Christopher Malloy spoke to a packed room about behavioral finance. Among the points he made were that we humans tend to form opinions based on a small amount of information and then stick to those opinions. He also gave strategies for avoiding (or least limiting) behavioral mistakes. Those strategies include avoiding overconfidence in part by accepting the limits of your knowledge, rephrasing questions or putting questions into a visual (instead of verbal) format, evaluating returns of stocks after you have sold them, seeking out commonalities in your past sell decisions (e.g., whether you tend to sell when stocks have gotten back to breakeven) and establishing mechanical rules for buying and selling.

Sir Bob Geldof, who is now the chairman of a private equity firm, gave an impassioned speech about investing in Africa. I asked him afterward how individual investors could go about investing in the continent. He said it’s very tough to do so because so many of the businesses there are very small and the continent is still developing.

The Week Ahead

AAII president John Bajkowski will be speaking to the Washington D.C. Metro chapter on Saturday.

Earnings season continues to wind down as only 23 members of the S&P 500 are scheduled to report. Three Dow Jones industrial average components are included in this group: Home Depot (HD) on Tuesday, Cisco Systems (CSCO) on Wednesday, and Wal-Mart Stores (WMT) on Thursday.

The week’s first economic reports of note will be the May Empire State manufacturing survey and the May housing market index, both of which will be released on Monday. Tuesday will feature the April Consumer Price Index (CPI), April housing starts and building permits, and April industrial production and capacity utilization. The minutes from last month’s Federal Open Market Committee (FOMC) meeting will be released on Wednesday. Thursday will feature the Philadelphia Federal Reserve’s May business outlook survey. Finally, April existing home sales will be released on Friday.

Three Federal Reserve officials will make public appearances: Minneapolis president Neel Kashkari on Monday; and San Francisco president John Williams and Dallas president Robert Kaplan on Tuesday.